Pound US Dollar (GBP/USD) Exchange Rate Slumps as Markets Price in Bumper Fed Hike

Pound US Dollar (GBP/USD) Exchange Rate Falls as Expectations of 1% Fed Hike Grow

(Updated 16:40 14/07/22)

The Pound US Dollar (GBP/USD) exchange rate continued to fall over the day’s session. The exchange rate was likely pulled lower by growing expectations that the Federal Reserve could raise interest rates by 1% at its next meeting.

Speaking today, Fed Governor Christopher Waller signaled that he would be open toward a larger hike if Friday’s retail sales figures rose above forecasts.

A rise to producer prices today also likely emboldened more hawkish USD investors. US PPI figures for June printed at 1.1% versus forecasts of 0.8%. A risk-on market mood may have also prompted the exchange rate to fall today.

Significant losses for the currency pair may have been prevented by an above-forecast rise to US initial jobless claims, however. Signs of a cooling labor market in the US may have limited bets on action from the Fed.

At time of writing the GBP/USD exchange rate is at around $1.1808, which is down around -0.5% from this morning’s opening figures.

Original article continues below:

Pound US Dollar (GBP/USD) Exchange Rate Dips amid Hawkish Fed Expectations

The Pound US Dollar (GBP/USD) exchange rate is trading close to two-year lows today. The currency pair is likely being pulled lower by market bets on a 1% interest rate hike from the Federal Reserve. An uptick to US Treasury bond yields may also be pushing the exchange rate higher.

Additionally, GBP/USD could be seeing headwinds amid a risk-off mood in the markets and Brexit-related woes.

At time of writing the GBP/USD exchange rate is at around $1.1846, which is down around -0.2% from this morning’s opening figures.

US Dollar (USD) Firms amid Prospects of 1% Fed Rate Hike

The US Dollar (USD) is trending higher against many of its rivals today. The possibility of a 1% interest rate hike from the Federal Reserve at their next meeting is likely supporting gains for the currency. The US Dollar Index has continued to climb to fresh highs, visiting peaks not seen since October 2002.

Markets started pricing in the aggressive rate hike after hotter than expected US inflation figures yesterday. The country’s rate of inflation rose to 9.1% in June, above forecasts of 8.8%, and represented the biggest gain since 1981.

Speaking on the figures and the Fed’s possible response on Wednesday, Christopher Rupkey of FWDBONDS said:

‘Despite the Fed’s best intentions, the economy looks to be moving into a higher inflation regime. The Fed is even further behind the curve after today’s sizzling report.’

The safe-haven ‘Greenback’ is also likely seeing gains amid a sustained risk-off market mood. Fears of a global recession are likely pushing investors toward USD. Rising Covid-19 cases in China and fears of an energy crisis in Europe may be prompting the sentiment.

Pound (GBP) Slips as NI Protocol Legislation Progresses through Commons

The Pound (GBP) is dipping against its competitors today amid a retreat to global risk appetite. Sterling may also be seeing headwinds amid the ongoing leadership contest to find Boris Johnson’s replacement.

After the first round of voting on Wednesday evening, Rishi Sunak and Penny Mordaunt emerged as the frontrunners for the premiership. Mordaunt is currently the bookies’ favourite.

Bullish stances toward the EU from most of the leadership candidates could cause further headwinds for the currency today. Investors remain concerned that the UK’s attempts to water down the Northern Ireland Protocol could prompt a UK-EU trade war.

In a House of Commons session on Wednesday, an alliance of opposition MPs attempted to introduce amendments to the legislation concerning the NI Protocol. These changes were voted down, however. This could further dampen confidence in GBP today.

GBP/USD Exchange Rate Forecast: Will US PPI Figures Increase Odds of 1% Fed Hike?

The Pound will see no further significant data releases this week but could continue to be affected by Brexit-related headwinds. Additionally, uncertainty surrounding the UK’s leadership contest could also weigh on Sterling.

Any further signals from the Bank of England (BoE) regarding interest rate hikes could also prompt movement in GBP.

For the US Dollar, June’s PPI figures could help to bolster the currency if they remain high as forecast later today. The data could increase bets on future Fed rate hikes after Wednesday’s hot inflation data.

On Friday, a predicted recovery to June’s retail sales figures could also see USD rise if they print as forecast. Sales figures are expected to return to growth after a slump in May.

Gareth Monk

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